-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MOaa1EoAGUvkztOyq11oTwPGXGvctP9rJpix0finGtoKaIrZKSdGyLQR78v/AVMX aUABO9p0WVVW6rFfGtO1Gw== 0000820027-05-000655.txt : 20050803 0000820027-05-000655.hdr.sgml : 20050803 20050803101402 ACCESSION NUMBER: 0000820027-05-000655 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050531 FILED AS OF DATE: 20050803 DATE AS OF CHANGE: 20050803 EFFECTIVENESS DATE: 20050803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXP INCOME SERIES INC CENTRAL INDEX KEY: 0000052407 IRS NUMBER: 410839316 STATE OF INCORPORATION: MN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-00499 FILM NUMBER: 05994086 BUSINESS ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 BUSINESS PHONE: 612-671-7981 MAIL ADDRESS: STREET 1: 50606 AXP FINANCIAL CENTER STREET 2: H27/52 CITY: MINNEAPOLIS STATE: MN ZIP: 55474 FORMER COMPANY: FORMER CONFORMED NAME: AXP SELECTIVE FUND INC /MN/ DATE OF NAME CHANGE: 20000829 FORMER COMPANY: FORMER CONFORMED NAME: IDS SELECTIVE FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: INVESTORS SELECTIVE FUND INC DATE OF NAME CHANGE: 19841002 N-CSR 1 incomeseries-nscr.txt AXP INCOME SERIES, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-499 ------------ AXP INCOME SERIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 50606 AXP Financial Center, Minneapolis, Minnesota 55474 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Leslie L. Ogg - 901 S. Marquette Avenue, Suite 2810, Minneapolis, MN 55402-3268 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (612) 330-9283 ----------------- Date of fiscal year end: 5/31 -------------- Date of reporting period: 5/31 -------------- AXP(R) Selective Fund Annual Report for the Period Ended May 31, 2005 AXP Selective Fund seeks to provide shareholders with current income and preservation of capital. (logo) (logo) American AMERICAN Express(R) EXPRESS Funds (R) Table of Contents Fund Snapshot 3 Performance Summary 4 Questions & Answers with Portfolio Management 5 The Fund's Long-term Performance 8 Investments in Securities 10 Financial Statements (Portfolio) 18 Notes to Financial Statements (Portfolio) 21 Report of Independent Registered Public Accounting Firm (Portfolio) 26 Financial Statements (Fund) 27 Notes to Financial Statements (Fund) 30 Report of Independent Registered Public Accounting Firm (Fund) 40 Federal Income Tax Information 41 Fund Expenses Example 44 Board Members and Officers 46 Approval of Investment Management Services Agreement 49 Proxy Voting 50 [DALBAR LOGO] American Express(R) Funds' reports to shareholders have been awarded the Communications Seal from Dalbar Inc., an independent financial services research firm. The Seal recognizes communications demonstrating a level of excellence in the industry. - -------------------------------------------------------------------------------- 2 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Fund Snapshot AT MAY 31, 2005 PORTFOLIO MANAGERS Portfolio managers Since Years in industry Jamie Jackson, CFA 6/03 17 Scott Kirby 6/03 24 Tom Murphy, CFA 2/03 19 FUND OBJECTIVE For investors seeking current income and preservation of capital. Inception dates by class A: 4/6/45 B: 3/20/95 C: 6/26/00 I: 7/15/04 Y: 3/20/95 Ticker symbols by class A: INSEX B: ISEBX C: ASLCX I: ASTIX Y: IDEYX Total net assets $913.9 million Number of holdings 261 Weighted average life(1) 6.1 years Effective duration(2) 3.7 years Weighted average bond rating(3) AA+ (1) Weighted average life measures a bond's maturity, which takes into consideration the possibility that the issuer may call the bond before its maturity date. (2) Effective duration measures the sensitivity of a security's price to parallel shifts in the yield curve (the graphical depiction of the levels of interest rates from two years out to 30 years). Positive duration means that as rates rise, the price decreases, and negative duration means that as rates rise, the price increases. (3) Weighted average bond rating represents the average credit quality of the underlying bonds in the portfolio. STYLE MATRIX Shading within the style matrix indicates areas in which the Fund generally invests. DURATION SHORT INT. LONG X HIGH MEDIUM QUALITY LOW SECTOR COMPOSITION Percentage of portfolio assets [PIE CHART] Mortgage-backed securities 35.4% U.S. government obligations & agencies 26.2% Corporate bonds* 17.2% CMBS/ABS** 13.7% Short-term securities*** 5.5% Foreign government bonds 2.0% * Includes 7.6% Financials, 1.9% Telecommunications services, 1.7% Industrials, 1.7% Information technology, 1.1% Consumer discretionary, 0.9% Energy, 0.9% Utilities, 0.5% Consumer staples, 0.5% Health care and 0.4% Materials. ** Commercial mortgage-backed/Asset-backed securities *** Of the 5.5%, 2.5% is due to security lending activity and 3.0% is the Portfolio's cash equivalent position. CREDIT QUALITY SUMMARY Percentage of bond portfolio assets AAA bonds 80.6% AA bonds 5.9% A bonds 3.9% BBB bonds 9.6% Individual security ratings are based on information from Standard & Poor's Corp. and Moody's Investors Service. If a rating is unavailable, the rating is determined through an internal analysis, if appropriate. Fund holdings are subject to change. - -------------------------------------------------------------------------------- 3 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Performance Summary [BAR CHART] PERFORMANCE COMPARISON For the year ended May 31, 2005 +6.06% +6.82% +7.26% +6.06% = AXP Selective Fund Class A (excluding sales charge) +6.82% = Lehman Brothers Aggregate Bond Index (unmanaged) +7.26% = Lipper Corporate Debt - A rated Funds Index (see "The Fund`s Long-term Performance" for Index descriptions) The performance information shown represents past performance and is not a guarantee of future results. The investment return and principal value of your investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. The 4.75% sales charge applicable to Class A shares of the Fund is not reflected in the bar chart. If reflected, returns would be lower than those shown. The performance of other classes may vary from that shown because of differences in expenses. The indices do not reflect the effects of sales charges, expenses (excluding Lipper) and taxes.
AVERAGE ANNUAL TOTAL RETURNS Class A Class B Class C Class I Class Y (Inception dates) (4/6/45) (3/20/95) (6/26/00) (7/15/04) (3/20/95) After After NAV(1) POP(2) NAV(1) CDSC(3) NAV(1) CDSC(4) NAV(5) NAV(6) at May 31, 2005 1 year +6.06% +1.02% +5.26% +0.26% +5.26% +4.26% N/A +6.24% 3 years +3.59% +1.92% +2.81% +1.54% +2.81% +2.81% N/A +3.72% 5 years +5.38% +4.36% +4.59% +4.26% N/A N/A N/A +5.53% 10 years +5.37% +4.86% +4.58% +4.58% N/A N/A N/A +5.51% Since inception +6.71% +6.62% +5.17% +5.17% +4.38% +4.38% +5.25%* +6.11% at June 30, 2005 1 year +6.01% +0.98% +5.22% +0.22% +5.22% +4.22% N/A +6.32% 3 years +4.17% +2.49% +3.38% +2.12% +3.38% +3.38% N/A +4.33% 5 years +5.03% +4.01% +4.24% +3.90% +4.24% +4.24% N/A +5.20% 10 years +5.34% +4.83% +4.54% +4.54% N/A N/A N/A +5.49% Since inception +6.71% +6.62% +5.16% +5.16% +4.38% +4.38% +5.68%* +6.11%
(1) Excluding sales charge. (2) Returns at public offering price (POP) reflect a sales charge of 4.75%. (3) Returns at maximum contingent deferred sales charge (CDSC). CDSC applies as follows: first year 5%; second and third year 4%; fourth year 3%; fifth year 2%; sixth year 1%; no sales charge thereafter. (4) 1% CDSC applies to redemptions made within the first year of purchase. (5) Sales charge is not applicable to these shares. Shares available to eligible investors only, currently limited to AXP Portfolio Builder Series funds, six affiliated funds-of-funds. (6) Sales charge is not applicable to these shares. Shares available to institutional investors only. * Not annualized. - -------------------------------------------------------------------------------- 4 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers WITH PORTFOLIO MANAGEMENT Below the Fund's portfolio management team discusses the Fund's results and positioning for the period. Q: How did AXP Selective Fund perform for the 12-month period ended May 31, 2005? A: AXP Selective Fund's Class A shares (excluding sales charge) gained 6.06% for the 12 months ended May 31, 2005. The Lehman Brothers Aggregate Bond Index (Lehman Index) rose 6.82%, while the Lipper Corporate Debt - A rated Funds Index, representing the Fund's peer group, advanced 7.26%. Q: What factors most significantly affected performance during the annual period? A: Several factors contributed positively to the Fund's performance. As the Federal Reserve Board (the Fed) raised interest rates eight times during the annual period, bringing the targeted federal funds rate to 3%, short-term Treasury rates rose dramatically. However, longer-term interest rates fell sharply, as global growth moderated and inflation pressures appeared to remain contained. As a result, the yield spread between two-year and 30-year maturity Treasuries narrowed significantly causing a flattening of the yield curve. We had prudently positioned the Fund with a modest exposure to shorter maturity bonds in favor of longer maturity securities, which outperformed. The Fund's sector allocation also helped relative returns for the annual period. Specifically, the Fund's positioning in mortgages, commercial mortgage-backed securities (CMBS) and asset-backed securities benefited performance. These high-quality spread sectors fared well during the fiscal year, as investors sought incremental yield from these securities. Within the mortgage sector, the Fund's relative results were also boosted by strong issue selection and a better-than-Lehman Index yield profile. While investment grade credit was the laggard of the spread sectors due mainly to a series of high-profile earnings and cash flow warnings by both General Motors and Ford, the Fund benefited from our tactical allocation shifts and issue selection within investment grade credit over the fiscal year. In particular, key holdings in cable, telecommunications and healthcare issues outperformed the Lehman Index. The Fund's performance was also modestly helped during the fiscal year by its small global bond position, which included holdings denominated in euros. These global bonds advanced due to the significant strengthening of the euro vs. the U.S. dollar in late 2004, even though the euro fell back to lower levels toward SEC YIELDS At May 31, 2005 by class A: 3.43% B: 2.85% C: 2.85% I: 3.95% Y: 3.77% At June 30, 2005 by class A: 3.48% B: 2.91% C: 2.91% I: 4.00% Y: 3.83% The Securities and Exchange Commission (SEC) yield is calculated by dividing anticipated net investment income during a 31-day period by the public offering price (POP) per share on the last day of the period, and converting the results to yearly figures. See Average Annual Total Returns on page 4 for additional performance information. - -------------------------------------------------------------------------------- 5 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We had prudently positioned the Fund with a modest exposure to shorter maturity bonds in favor of longer maturity securities, which outperformed. [END CALLOUT QUOTE] the end of the period. A weaker dollar increases the value of the Fund's foreign currency denominated securities when expressed in U.S. dollar terms. Partially offsetting these positives was the Fund's focus within the mortgage sector on higher coupon bonds. While these bonds offered both attractive yields and potential protection from higher rates, lower coupon bonds outperformed for the 12 months. Also detracting from the Fund's relative results was its moderate position within agencies, which performed well over the period. Furthermore, the Fund's investment strategy precludes it from owning high yield corporate or emerging market bonds. These two sectors, held by many funds in our peer group, significantly outpaced the Lehman Index for the annual period. Overall, the Fund's conservative risk profile hurt relative returns at a time when shorter-term securities underperformed and long-term bonds rallied. We believed rates would move more aggressively than they did and sought to reduce the Fund's exposure to volatility when possible. The Fund's duration positioning had a rather neutral effect on its relative performance, as the yield on five-year Treasuries, a good proxy for the duration of the Lehman Index, was essentially unchanged from the beginning to end of the fiscal year. Q: What changes did you make to the Fund and how is it currently positioned? A: As the yield curve flattened dramatically, we removed some of the Fund's yield curve flattening bias and reduced the portfolio's sensitivity to changes in interest rates. While we kept duration shorter than the Lehman Index throughout the annual period, we made minor adjustments to portfolio duration and yield curve positioning as market conditions changed relative to our view on interest rates. Within the spread sectors, we maintained the Fund's significant exposure to CMBS and asset-backed securities throughout the fiscal year, as we believe these sectors offer attractive yield as well as the kind of defensive characteristics we want in the current market environment. However, in mortgages and investment grade credit, we tactically shifted Fund allocations as our opinion of sector relative value evolved. We also increased the Fund's cash position, patiently seeking opportunities to invest in the market at higher yield levels. - -------------------------------------------------------------------------------- 6 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Questions & Answers [BEGIN CALLOUT QUOTE]> We will continue to monitor inflation numbers, as they remain the key indicator for the economy in the coming months. [END CALLOUT QUOTE] Throughout the period, we constantly re-evaluated all of the Fund's positions as we sought to have the best risk/reward opportunities in the Fund across sectors, with an eye toward holding greater positions in securities that may offer the highest likelihood of outperforming the Lehman Index. Overall, the opportunistic changes we made in response to valuations or market developments resulted in an annual portfolio turnover rate of 297%. At the end of the annual period, the Fund had a modest exposure to investment grade credit and mortgage securities in favor of CMBS and asset-backed securities and a small position in global bonds. Q: How do you intend to manage the Fund in the coming months? A: We intend to position the Fund for ongoing U.S. economic recovery and still higher interest rates, as these themes are likely to continue to weigh on the fixed income markets through the summer. There may be cause for the Fed to deviate from its measured pace and increase interest rates more vigorously than the market currently anticipates. Indeed, we will continue to monitor inflation numbers, as they remain the key indicator for the economy in the coming months. In addition, we anticipate that the yield curve may flatten a bit more in the near term but that after an extended period of yield curve flattening, the difference between short- and long-term maturities may stabilize somewhat in the months ahead with more parallel shifts across the yield curve. Based on this view, we intend to maintain the Fund's duration shorter than that of the Lehman Index for the near term. In the spread sectors, we intend to maintain the Fund's modest exposure to investment grade credit and to maintain a defensive position in mortgages by emphasizing premium coupons, 15-year mortgages and attractive structural attributes. We further intend to maintain our emphasis on defensive investments such as AAA-rated CMBS and asset-backed securities as high-quality substitutes for corporate bonds. As always, we maintain a disciplined focus on individual security selection. - -------------------------------------------------------------------------------- 7 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Fund's Long-term Performance The chart on the facing page illustrates the total value of an assumed $10,000 investment in AXP Selective Fund Class A shares (from 6/1/95 to 5/31/05) as compared to the performance of two widely cited performance indices, the Lehman Brothers Aggregate Bond Index and the Lipper Corporate Debt - A rated Funds Index. In comparing the Fund's Class A shares to these indices, you should take into account the fact that the Fund's performance reflects the maximum sales charge of 4.75%, while such charges are not reflected in the performance of the indices. Returns for the Fund include the reinvestment of any distribution paid during each period. The performance information shown represents past performance and is not a guarantee of future results. The value of your investment and returns will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Returns do not reflect taxes payable on distributions and redemptions. Current performance may be lower or higher than the performance information shown. You may obtain performance information current to the most recent month-end by calling (800) 862-7919 or visiting www.americanexpress.com/funds. Also see "Past Performance" in the Fund's current prospectus. You should consider the investment objectives, risks, and charges and expenses of the Fund carefully before investing. DISTRIBUTION SUMMARY The table below details the Fund's income and capital gain distributions for the fiscal years shown. More information on the other classes can be found in the Financial Highlights section of this report's Notes to Financial Statements. Class A Short-term Long-term Fiscal year ended Income capital gains capital gains Total May 31, 2005 $0.32 $ -- $ -- $0.32 May 31, 2004 0.28 -- -- 0.28 May 31, 2003 0.33 0.01 0.03 0.37 May 31, 2002 0.40 -- 0.02 0.42 May 31, 2001 0.52 -- -- 0.52 - -------------------------------------------------------------------------------- 8 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT [LINE CHART]
VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN AXP SELECTIVE FUND AXP Selective Fund Class A (includes sales charge) $ 9,525 $ 9,936 $10,738 $11,828 $12,265 $12,367 $13,791 $14,460 $15,335 $15,155 $16,074 Lehman Brothers Aggregate Bond Index(1) $10,000 $10,438 $11,306 $12,540 $13,085 $13,362 $15,115 $16,339 $18,231 $18,151 $19,389 Lipper Corporate Debt - A rated Funds Index(2) $10,000 $10,385 $11,227 $12,490 $12,815 $12,877 $14,521 $15,521 $17,264 $17,209 $18,459 `95 `96 `97 `98 `99 `00 `01 `02 `03 `04 `05
COMPARATIVE RESULTS Results at May 31, 2005 Since 1 year 3 years 5 years 10 years inception(3) AXP Selective Fund (includes sales charge) Class A Cumulative value of $10,000 $10,102 $10,587 $12,379 $16,074 $472,624 Average annual total return +1.02% +1.92% +4.36% +4.86% +6.62% Lehman Brothers Aggregate Bond Index(1) Cumulative value of $10,000 $10,682 $11,866 $14,511 $19,389 N/A Average annual total return +6.82% +5.87% +7.73% +6.85% N/A Lipper Corporate Debt - A rated Funds Index(2) Cumulative value of $10,000 $10,726 $11,893 $14,336 $18,459 N/A Average annual total return +7.26% +5.95% +7.47% +6.32% N/A
Results for other share classes can be found on page 4. (1) The Lehman Brothers Aggregate Bond Index, an unmanaged index, is made up of a representative list of government, corporate, asset-backed and mortgage-backed securities. The index is frequently used as a general measure of bond market performance. The index reflects reinvestment of all distributions and changes in market prices, but excludes brokerage commissions or other fees. However, the securities used to create the index may not be representative of the bonds held in the Fund. (2) The Lipper Corporate Debt - A rated Funds Index includes the 30 largest corporate debt A rated funds tracked by Lipper Inc. The index's returns include net reinvested dividends. (3) Fund data is from April 6, 1945. The Fund began operating before the inception of the Lehman Brothers Aggregate Bond Index and Lipper peer group. - -------------------------------------------------------------------------------- 9 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Investments in Securities Quality Income Portfolio May 31, 2005 (Percentages represent value of investments compared to net assets) Bonds (100.4%) Issuer Coupon Principal Value(a) rate amount Foreign government (2.1%) Bundesrepublik Deutschland (European Monetary Unit) 01-04-07 6.00% 4,673,000(c) $6,092,942 Pemex Project Funding Master Trust (U.S. Dollar) 12-15-14 7.38 3,857,000(c) 4,321,769 United Kingdom Treasury (British Pound) 12-07-06 7.50 3,223,000(c) 6,131,094 United Mexican States (U.S. Dollar) 09-27-34 6.75 2,485,000(c) 2,625,403 Total 19,171,208 U.S. government obligations & agencies (27.8%) Federal Home Loan Bank 05-22-06 2.88 14,730,000 14,620,438 08-11-06 3.25 7,050,000 7,013,199 04-18-08 4.13 2,585,000 2,603,144 06-14-13 3.88 10,500,000 10,299,933 Federal Home Loan Mtge Corp 09-15-06 3.63 7,265,000 7,257,938 06-15-08 3.88 18,350,000 18,367,800 03-18-09 3.76 2,810,000 2,789,962 07-15-09 4.25 10,000,000 10,112,073 01-15-12 5.75 14,425,000 15,750,831 Federal Natl Mtge Assn 05-15-11 6.00 3,520,000 3,859,184 Overseas Private Investment U.S. Govt Guaranty Series 1996A 09-15-08 6.99 3,888,889 4,068,944 U.S. Treasury 12-31-05 1.88 3,000,000(l) 2,975,976 08-15-07 2.75 9,000,000 8,837,226 02-15-08 3.38 11,740,000 11,659,745 04-15-10 4.00 13,910,000(m) 14,053,440 05-15-10 3.88 5,425,000(m) 5,454,669 02-15-15 4.00 11,065,000(m) 11,039,064 05-15-15 4.13 12,975,000 13,100,702 08-15-23 6.25 19,435,000 23,944,522 Bonds (continued) Issuer Coupon Principal Value(a) rate amount U.S. government obligations & agencies (cont.) U.S. Treasury (cont.) 02-15-26 6.00% $52,654,000(l) $63,964,342 02-15-31 5.38 2,080,000 2,408,900 Total 254,182,032 Commercial mortgage-backed(f)/ Asset-backed securities (14.6%) AAA Trust Series 2005-2 Cl A1 11-26-35 3.19 7,041,361(d,i) 7,041,360 Aesop Funding II LLC Series 2004-2A Cl A1 (FGIC) 04-20-08 2.76 825,000(d,e) 808,603 AmeriCredit Automobile Receivables Trust Series 2004-CA Cl A3 (AMBAC) 03-06-09 3.00 2,000,000(e) 1,982,188 Series 2004-DF Cl A3 (FSA) 07-06-09 2.98 1,500,000(e) 1,477,970 Series 2005-BM Cl A3 (MBIA) 02-06-10 4.05 3,000,000(b,e) 2,992,968 ARG Funding Series 2005-1A Cl A3 (MBIA) 04-20-10 4.29 2,250,000(d,e) 2,242,002 Banc of America Commercial Mtge Series 2004-5 Cl A4 11-10-41 4.94 1,300,000 1,331,447 Series 2005-1 Cl A4 11-10-42 5.03 1,250,000 1,288,599 Bear Stearns Commercial Mtge Securities Series 2003-T10 Cl A1 03-13-40 4.00 3,024,821 2,976,818 Series 2004-PWR6 Cl A6 11-11-41 4.83 1,750,000 1,775,918 Series 2004-T16 Cl A3 02-13-46 4.03 600,000 595,113 California State Teachers' Retirement System Trust Series 2002-C6 Cl A3 11-20-14 4.46 5,368,616(d) 5,407,821 Capital Auto Receivables Asset Trust Series 2005-1 Cl A4 07-15-09 4.05 2,800,000(b) 2,801,750 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 10 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Capital One Auto Finance Trust Series 2005-BSS Cl A3 11-15-09 4.08% $1,600,000(b) $1,599,927 Carmax Auto Owner Trust Series 2005-1 Cl A4 03-15-10 4.35 900,000 906,227 Citigroup Commercial Mtge Trust Series 2005-EMG Cl A1 09-20-51 4.15 4,500,000(d) 4,490,508 Commercial Mtge Pass-Through Ctfs Series 2004-CNL Cl A1 09-15-14 3.31 3,280,000(d,i) 3,280,328 Series 2004-LB3A Cl A3 07-10-37 5.09 3,500,000 3,607,917 Series 2004-LB3A Cl A4 07-10-37 5.23 906,000 941,740 CS First Boston Mtge Securities Series 2002-CKS4 Cl A1 11-15-36 4.49 1,922,104 1,934,633 Series 2004-C1 Cl A2 01-15-37 3.52 1,550,000 1,517,608 Federal Natl Mtge Assn 11-01-10 4.47 559,054 559,272 11-01-12 4.84 1,830,898 1,895,584 GE Capital Commercial Mtge Series 2001-3 Cl A1 06-10-38 5.56 2,826,726 2,924,241 Series 2004-C2 Cl A2 03-10-40 4.12 3,250,000 3,223,253 GMAC Commercial Mtge Securities Series 1999-C1 Cl B 05-15-33 6.30 2,200,000 2,347,532 Series 2004-C3 Cl A4 12-10-41 4.55 1,700,000 1,703,342 Series 2004-C3 Cl A5 12-10-41 4.86 1,800,000 1,828,044 Greenwich Capital Commercial Funding Series 2005-GG3 Cl A1 08-10-42 3.92 1,242,393 1,238,268 Honda Auto Receivables Owner Trust Series 2005-1 Cl A3 10-21-08 3.53 1,400,000 1,393,126 JPMorgan Chase Commercial Mtge Securities Series 2002-CIB5 Cl A1 10-12-37 4.37 1,345,246 1,351,545 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) JPMorgan Chase Commercial Mtge Securities (cont.) Series 2003-CB6 Cl A2 07-12-37 5.26% $1,500,000 $1,565,945 Series 2003-LN1 Cl A1 10-15-37 4.13 1,290,694 1,277,434 Series 2003-ML1A Cl A1 03-12-39 3.97 1,113,017 1,099,182 Series 2004-CBX Cl A3 01-12-37 4.18 1,000,000 993,776 Series 2004-CBX Cl A5 01-12-37 4.65 1,500,000 1,509,350 Series 2005-CB11 Cl A3 08-12-37 5.20 1,557,000 1,616,425 LB-UBS Commercial Mtge Trust Series 2002-C2 Cl A3 06-15-26 5.39 2,790,000 2,917,832 Series 2002-C4 Cl A4 09-15-26 4.56 1,800,000 1,810,012 Series 2003-C8 Cl A2 11-15-27 4.21 5,130,000 5,126,305 Series 2003-C8 Cl A3 11-15-27 4.83 1,150,000 1,173,748 Series 2004-C2 Cl A3 03-15-29 3.97 1,200,000 1,165,548 Series 2004-C4 Cl A3 06-15-29 4.99 1,000,000(i) 1,037,265 Series 2004-C6 Cl A2 08-15-29 4.19 1,995,000 1,983,090 Series 2004-C6 Cl A4 08-15-29 4.58 450,000 453,135 Series 2004-C7 Cl A2 10-15-29 3.99 1,000,000 987,500 Series 2004-C8 Cl A2 12-15-29 4.20 2,300,000 2,292,916 Long Beach Auto Receivables Trust Series 2004-C Cl A3 (FSA) 09-15-09 3.40 1,400,000(e) 1,390,060 Metris Master Trust Series 2004-2 Cl M 10-20-10 3.48 1,000,000(i) 1,000,650 Morgan Stanley Auto Loan Trust Series 2004-HB2 Cl A3 03-16-09 2.94 1,500,000 1,478,513 Morgan Stanley Capital I Series 2003-IQ4 Cl A1 05-15-40 3.27 4,331,446 4,148,087 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 11 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Commercial mortgage-backed(f)/ Asset-backed securities (cont.) Morgan Stanley Capital I (cont.) Series 2004-HQ4 Cl A5 04-14-40 4.59% $1,350,000 $1,357,655 Series 2004-IQ8 Cl A2 06-15-40 3.96 2,200,000 2,186,024 Morgan Stanley, Dean Witter Capital I Series 2002-TOP7 Cl A2 01-15-39 5.98 2,235,000 2,426,912 Nissan Auto Lease Trust Series 2004-A Cl A3 08-15-07 2.90 1,450,000 1,434,456 Nissan Auto Receivables Owner Trust Series 2003-A Cl A4 07-15-08 2.61 980,000 966,691 Series 2005-A Cl A3 10-15-08 3.54 1,900,000 1,888,619 Popular ABS Mtge Pass-Through Trust Series 2005-A Cl AF2 06-25-35 4.49 955,000 957,316 Prudential Commercial Mtge Trust Series 2003-PWR1 Cl A1 02-11-36 3.67 1,539,505 1,506,232 Residential Asset Securities Series 2002-KS1 Cl AI4 (AMBAC) 11-25-29 5.86 843,801(e) 844,113 Triad Auto Receivables Owner Trust Series 2005-A Cl A3 (AMBAC) 03-12-10 4.05 2,700,000(e) 2,702,052 Wachovia Bank Commercial Mtge Trust Series 2005-C16 Cl A2 10-15-41 4.38 1,500,000 1,502,545 Series 2005-C16 Cl A3 10-15-41 4.62 1,962,000 1,973,328 WFS Financial Owner Trust Series 2004-1 Cl D 08-22-11 3.17 1,260,191 1,247,631 Series 2004-3 Cl A3 03-17-09 3.30 5,000,000 4,955,410 World Omni Auto Receivables Trust Series 2005-A Cl A3 06-12-09 3.54 2,750,000 2,736,443 Total 133,177,852 Mortgage-backed securities (37.6%)(f,k) Adjustable Rate Mtge Trust Series 2004-2 Cl 6A1 02-25-35 5.28 2,086,882(j) 2,118,197 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Banc of America Mtge Securities Series 2004-F Cl B1 07-25-34 4.14% $1,835,249(j) $1,858,152 Bank of America Alternative Loan Trust Series 2003-11 Cl 1A1 01-25-34 6.00 2,476,547 2,522,586 Series 2003-11 Cl 4A1 01-25-19 4.75 1,401,362 1,401,513 Bear Stearns Adjustable Rate Mtge Trust Series 2004-12 Cl 3A1 02-25-35 5.19 2,166,044(j) 2,191,863 Chaseflex Trust Series 2005-2 Cl 2A2 06-25-35 6.50 3,453,833 3,574,717 Countrywide Alternative Loan Trust Series 2003-11T1 Cl A1 07-25-18 4.75 1,599,027 1,594,559 Series 2005-6CB Cl 1A1 04-25-35 7.50 2,238,341 2,353,501 Countrywide Home Loans Series 2004-12 Cl 1M 08-25-34 4.65 1,173,689(j) 1,177,069 CS First Boston Mtge Securities Series 2004-AR5 Cl CB1 06-25-34 4.43 1,191,711(j) 1,176,018 Federal Home Loan Mtge Corp 05-01-13 4.50 2,129,169 2,137,222 11-01-14 7.50 1,768,937 1,886,044 07-01-16 8.00 142 153 01-01-17 8.00 1,038 1,127 03-01-17 8.50 12,705 13,798 06-01-17 8.50 4,163 4,522 07-01-17 7.00 5,912,492 6,204,201 05-01-18 5.50 1,962,852 2,016,935 09-01-18 5.00 3,704,708 3,754,184 10-01-18 5.00 5,809,495 5,882,930 01-01-19 5.50 794,006 815,884 09-01-19 8.50 36,615 39,867 04-01-21 9.00 107,581 117,366 03-01-22 8.50 232,099 253,610 08-01-22 8.50 213,851 233,767 02-01-25 8.00 304,288 329,803 01-01-32 6.50 4,278,916 4,461,572 03-01-32 6.50 1,587,287 1,655,795 06-01-32 7.00 1,461,576 1,546,635 07-01-32 7.00 5,097,801 5,374,965 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 12 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Home Loan Mtge Corp (cont.) 04-01-33 6.00% $5,788,878 $6,003,597 06-01-33 5.50 3,506,704 3,563,294 12-01-33 5.00 2,999,300 2,999,768 Collateralized Mtge Obligation 04-15-15 4.50 4,850,000 4,881,380 01-15-18 6.50 1,453,071 1,550,085 02-15-27 5.00 4,000,000 4,049,854 10-15-27 5.00 7,425,000 7,576,364 06-15-28 5.00 4,625,000 4,725,150 12-15-28 5.50 2,175,000 2,240,123 02-15-33 5.50 3,551,116 3,662,691 Interest Only 02-15-14 7.40 1,474,250(g) 109,183 Federal Natl Mtge Assn 04-01-14 6.00 2,563,871 2,659,617 06-01-15 5.50 4,600,000(b) 4,738,445 03-01-17 6.50 3,044,497 3,177,931 04-01-17 6.50 1,367,657 1,427,598 08-01-17 6.00 5,967,578 6,186,569 09-01-17 6.00 6,663,434 6,907,959 04-01-18 5.00 5,725,252 5,808,123 05-01-18 5.50 4,622,627 4,757,964 05-01-18 6.00 4,240,149 4,396,174 06-01-18 4.50 1,686,147 1,682,127 06-01-18 5.00 1,933,820 1,961,271 08-01-18 4.50 5,619,941 5,601,940 10-01-18 4.50 3,105,666 3,098,262 01-01-19 5.50 974,763 1,001,954 02-01-19 5.00 2,637,351 2,669,866 06-01-20 5.50 4,500,000(b) 4,619,529 06-01-20 6.00 9,000,000(b) 9,323,441 07-01-23 5.00 2,890,984 2,912,594 07-01-23 5.50 3,366,992 3,438,720 09-01-23 5.50 3,621,190 3,698,334 12-01-26 8.00 419,391 453,479 04-01-27 7.50 442,884 475,677 08-01-27 8.00 469,587 507,446 01-01-28 6.50 261,912 273,951 07-01-28 5.50 1,860,394 1,895,252 11-01-28 5.50 3,242,514 3,303,267 04-01-29 5.00 3,596,936 3,596,835 01-01-30 8.00 368,788 397,761 06-01-31 7.00 3,868,363 4,107,784 03-01-32 7.50 566,246 606,250 04-01-32 7.50 397,172 424,908 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) Federal Natl Mtge Assn (cont.) 05-01-32 7.50% $573,968 $614,699 06-01-32 7.50 1,364,799 1,460,107 07-01-32 6.50 1,034,085 1,079,934 08-01-32 6.50 6,100,410 6,365,411 08-01-32 7.00 651,536 688,379 09-01-32 6.50 2,456,792 2,556,035 11-01-32 6.50 1,329,503 1,390,369 01-01-33 6.00 4,439,520 4,577,162 02-01-33 6.00 9,170,032 9,476,708 04-01-33 5.50 20,908,591 21,281,458 04-01-33 6.00 9,840,429 10,210,997 05-01-33 5.50 5,640,146 5,731,855 07-01-33 4.85 2,267,564(j) 2,269,151 07-01-33 5.50 3,467,471 3,519,797 08-01-33 5.50 815,065 827,365 11-01-33 7.00 2,721,762 2,873,773 01-01-34 6.50 1,514,497 1,581,582 09-01-34 4.84 3,940,838(j) 3,976,716 12-01-34 4.40 1,029,324(j) 1,026,905 12-01-34 6.50 3,232,068 3,359,353 Collateralized Mtge Obligation 12-25-26 8.00 1,578,516 1,673,448 Interest Only 12-25-12 13.29 1,315,628(g) 68,593 12-25-22 3.19 1,178,687(g) 162,427 12-25-31 1.19 1,412,165(g) 227,696 Principal Only 09-01-18 4.72 27,473(h) 24,115 First Horizon Alternative Mtge Securities Series 2004-AA4 Cl A1 10-25-34 5.43 2,002,221 2,043,788 Series 2005-AA2 Cl 2A1 04-25-35 5.45 2,619,895 2,676,301 Series 2005-AA3 Cl 3A1 05-25-35 5.44 2,380,039 2,421,238 Series 2005-AA4 Cl B1 06-25-35 5.40 724,909 735,669 Govt Natl Mtge Assn 05-15-26 7.50 679,575 730,627 12-15-32 6.00 9,762,847 10,095,530 07-15-33 5.00 2,541,253 2,563,921 10-15-33 5.00 2,595,756 2,618,480 10-15-33 5.50 4,102,369 4,194,641 Collateralized Mtge Obligation Interest Only 01-20-32 0.00 1,012,063(g) 108,337 08-20-32 0.00 4,267,118(g) 595,315 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 13 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Mortgage-backed securities (cont.) IndyMac Index Mtge Loan Trust Series 2005-AR3 Cl 3A1 04-25-35 5.34% $1,393,575(j) $1,414,576 Series 2005-AR8 Cl AX1 Interest Only 04-25-35 4.50 80,370,000(g,j) 1,054,856 Master Adjustable Rate Mtge Trust Series 2004-5 Cl B1 07-25-34 4.41 1,459,135(j) 1,464,461 Master Alternative Loans Trust Series 2004-4 Cl 2A1 05-25-34 6.00 3,856,207 3,957,047 Series 2004-7 Cl 8A1 08-25-19 5.00 1,735,610 1,744,791 Series 2004-8 Cl 7A1 09-25-19 5.00 2,445,120 2,458,862 Series 2005-1 Cl 2A1 02-25-35 6.00 3,173,446 3,265,202 Structured Adjustable Rate Mtge Loan Series 2004-5 Cl B1 05-25-34 4.62 1,346,417(j) 1,331,876 Structured Asset Securities Series 2003-33H Cl 1A1 10-25-33 5.50 5,539,682 5,567,174 Washington Mutual Series 2003-AR10 Cl A7 10-25-33 4.07 2,375,000(j) 2,376,823 Series 2004-CB2 Cl 6A 07-25-19 4.50 1,684,910 1,651,835 Wells Fargo Mtge Backed Securities Trust Series 2005-5 Cl 2A1 05-25-35 5.50 3,993,925 4,063,908 Series 2005-AR1 Cl 1A1 02-25-35 4.57 3,636,512(j) 3,636,730 Total 343,967,095 Automotive & related (0.3%) Lear Series B 08-01-14 5.75 2,625,000 2,392,953 Nissan Motor Acceptance 03-08-10 4.63 600,000(d) 600,354 Total 2,993,307 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Banks and savings & loans (3.1%) Banknorth Group Sr Nts 05-01-08 3.75% $3,370,000(l) $3,342,467 JPMorgan Chase & Co 03-01-15 4.75 2,440,000 2,428,993 KFW Intl Finance (U.S. Dollar) 10-17-05 2.50 6,275,000(c) 6,250,540 Washington Mutual Bank FA Sub Nts 06-15-11 6.88 2,175,000 2,428,031 08-15-14 5.65 2,875,000 3,042,153 Wells Fargo Bank NA Sub Nts 02-01-11 6.45 9,949,000 10,940,248 Total 28,432,432 Broker dealers (0.3%) Goldman Sachs Group 07-15-13 4.75 2,115,000 2,106,773 Morgan Stanley 03-01-13 5.30 900,000 928,881 Total 3,035,654 Cable (0.6%) Comcast 03-15-11 5.50 4,915,000 5,123,543 Energy (0.4%) Nexen (U.S. Dollar) 03-10-35 5.88 1,705,000(c) 1,683,096 Occidental Petroleum Sr Nts 01-15-12 6.75 1,975,000 2,223,876 Total 3,906,972 Energy equipment & services (0.5%) Halliburton 10-15-10 5.50 4,405,000 4,606,027 Finance companies (0.9%) Citigroup Sr Nts 05-29-15 4.70 8,525,000(b) 8,545,622 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 14 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Bonds (continued) Issuer Coupon Principal Value(a) rate amount Financial services (1.9%) Archstone-Smith Operating Trust 05-01-15 5.25% $3,070,000 $3,113,781 Capital One Financial 06-01-15 5.50 2,555,000 2,576,403 Pricoa Global Funding I 06-15-08 4.35 2,435,000(d) 2,444,618 01-15-10 4.20 9,325,000(d) 9,270,543 Total 17,405,345 Food (0.6%) Kraft Foods 11-01-11 5.63 2,345,000 2,469,121 06-01-12 6.25 2,810,000 3,073,968 Total 5,543,089 Health care services (0.5%) Cardinal Health 06-15-15 4.00 5,350,000 4,939,805 Industrial transportation (0.9%) ERAC USA Finance 05-01-15 5.60 1,750,000(d) 1,795,917 Union Pacific 04-15-12 6.50 2,520,000 2,778,751 05-01-14 5.38 3,145,000 3,265,110 Total 7,839,778 Insurance (1.8%) Allstate Sr Nts 05-09-35 5.55 1,750,000 1,805,027 ASIF Global Financing XIX 01-17-13 4.90 5,015,000(d) 5,059,884 ING Security Life Institutional Funding 01-15-10 4.25 5,350,000(d) 5,327,873 Metropolitan Life Global Funding I Sr Nts 05-05-10 4.50 3,215,000(d) 3,231,110 Pacific Life 09-15-33 6.60 635,000(d) 740,969 Total 16,164,863 Media (0.3%) News America 12-15-34 6.20 2,360,000 2,439,995 Bonds (continued) Issuer Coupon Principal Value(a) rate amount Multi-industry (0.9%) Tyco Intl Group (U.S. Dollar) 02-15-11 6.75% $7,710,000(c) $8,531,639 Paper & packaging (0.4%) Weyerhaeuser 03-15-12 6.75 3,565,000 3,917,094 Telecom equipment & services (1.8%) Sprint Capital 01-30-11 7.63 4,120,000 4,685,351 11-15-28 6.88 2,965,000 3,363,591 TELUS (U.S. Dollar) 06-01-11 8.00 7,367,500(c) 8,593,039 Total 16,641,981 Utilities -- electric (0.9%) Dayton Power & Light 1st Mtge 10-01-13 5.63 515,000(d) 534,081 Florida Power 1st Mtge 03-01-13 4.80 660,000 665,999 Ohio Power Sr Nts Series H 01-15-14 4.85 2,545,000 2,570,272 Westar Energy 1st Mtge 07-01-14 6.00 4,150,000 4,510,888 Total 8,281,240 Utilities -- telephone (2.1%) Deutsche Telekom Intl Finance (U.S. Dollar) 07-22-13 5.25 1,240,000(c) 1,280,709 Telecom Italia Capital (U.S. Dollar) 09-30-34 6.00 1,275,000(c,d) 1,293,092 Verizon Pennsylvania Series A 11-15-11 5.65 15,740,000 16,422,959 Total 18,996,760 Total bonds (Cost: $910,141,301) $917,843,333 See accompanying notes to investments in securities. - -------------------------------------------------------------------------------- 15 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Short-term securities (5.9%)(n) Issuer Effective Amount Value(a) yield payable at maturity U.S. government agencies (1.3%) Federal Home Loan Mtge Corp Disc Nt 06-28-05 2.97% $10,000,000 $9,976,939 Federal Natl Mtge Assn Disc Nt 06-22-05 2.74 1,600,000 1,597,323 Total 11,574,262 Short-term securities (continued) Issuer Effective Amount Value(a) yield payable at maturity Commercial paper (4.6%) Barton Capital 06-02-05 3.02% $10,000,000 $9,998,322 HSBC Finance 06-01-05 3.07 2,000,000 1,999,829 Kitty Hawk Funding 06-01-05 3.02 15,000,000 14,998,742 Societe Generale North America 06-27-05 3.04 15,000,000 14,965,913 Total 41,962,806 Total short-term securities (Cost: $53,541,373) $53,537,068 Total investments in securities (Cost: $963,682,674)(o) $971,380,401 Notes to investments in securities (a) Securities are valued by procedures described in Note 1 to the financial statements. (b) At May 31, 2005, the cost of securities purchased, including interest purchased, on a when-issued and/or other forward-commitment basis was $28,606,835. (c) Foreign security values are stated in U.S. dollars. For debt securities, principal amounts are denominated in the currency indicated. At May 31, 2005, the value of foreign securities represented 5.1% of net assets. (d) Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Fund's Board of Directors. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2005, the value of these securities amounted to $53,569,063 or 5.9% of net assets. (e) The following abbreviations are used in the portfolio security descriptions to identify the insurer of the issue: AMBAC -- Ambac Assurance Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance MBIA -- MBIA Insurance Corporation (f) Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property, and include single- and multi-class pass-through securities and collateralized mortgage obligations. These securities may be issued or guaranteed by U.S. government agencies or instrumentalities, or by private issuers, generally originators and investors in mortgage loans, including savings associations, mortgage bankers, commercial banks, investment bankers and special purpose entities. The maturity dates shown represent the original maturity of the underlying obligation. Actual maturity may vary based upon prepayment activity on these obligations. Unless otherwise noted, the coupon rates presented are fixed rates. (g) Interest only represents securities that entitle holders to receive only interest payments on the underlying mortgages. The yield to maturity of an interest only is extremely sensitive to the rate of principal payments on the underlying mortgage assets. A rapid (slow) rate of principal repayments may have an adverse (positive) effect on yield to maturity. The principal amount shown is the notional amount of the underlying mortgages. Interest rate disclosed represents yield based upon the estimated timing and amount of future cash flows at May 31, 2005. - -------------------------------------------------------------------------------- 16 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to investments in securities (continued) (h) Principal only represents securities that entitle holders to receive only principal payments on the underlying mortgages. The yield to maturity of a principal only is sensitive to the rate of principal payments on the underlying mortgage assets. A slow (rapid) rate of principal repayments may have an adverse (positive) effect on yield to maturity. Interest rate disclosed represents yield based upon the estimated timing of future cash flows at May 31, 2005. (i) Interest rate varies either based on a predetermined schedule or to reflect current market conditions; rate shown is the effective rate on May 31, 2005. (j) Adjustable rate mortgage; interest rate varies to reflect current market conditions; rate shown is the effective rate on May 31, 2005. (k) Comparable securities are held to satisfy future delivery requirements of the following open forward sale commitments at May 31, 2005: Security Principal Settlement Proceeds Value amount date receivable Federal Natl Mtge Assn 06-20-20 4.50% $ 3,425,000 6-16-05 $ 3,377,906 $ 3,408,944 06-01-35 5.50 22,000,000 6-13-05 22,142,344 22,295,636 06-01-35 6.00 9,000,000 6-13-05 9,215,156 9,247,500 06-01-35 6.50 16,700,000 6-13-05 17,362,188 17,347,125 (l) Partially pledged as initial deposit on the following open interest rate futures contracts (see Note 5 to the financial statements): Type of security Notional amount Purchase contracts U.S. Treasury Note, Sept. 2005, 5-year $20,000,000 Sale contracts U.S. Treasury Note, Sept. 2005, 10-year 70,600,000 (m) At May 31, 2005, security was partially or fully on loan. See Note 4 to the financial statements. (n) Cash collateral received from security lending activity is invested in short-term securities and represents 2.7% of net assets. See Note 4 to the financial statements. 3.2% of net assets is the Portfolio's cash equivalent position. (o) At May 31, 2005, the cost of securities for federal income tax purposes was $964,717,950 and the aggregate gross unrealized appreciation and depreciation based on that cost was: Unrealized appreciation $10,583,157 Unrealized depreciation (3,920,706) ---------- Net unrealized appreciation $ 6,662,451 ----------- How to find information about the Fund's portfolio holdings (i) The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q; (ii) The Fund's Forms N-Q are available on the Commission's website at http://www.sec.gov; (iii) The Fund's Forms N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, DC (information on the operations of the Public Reference Room may be obtained by calling 1-800-SEC-0330); and (iv) The Fund's complete schedule of portfolio holdings, as disclosed in its annual and semiannual shareholder reports and in its filings on Form N-Q, can be found at www.americanexpress.com/funds. - -------------------------------------------------------------------------------- 17 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Financial Statements
Statement of assets and liabilities Quality Income Portfolio May 31, 2005 Assets Investments in securities, at value (Note 1)* (identified cost $963,682,674) $ 971,380,401 Dividends and accrued interest receivable 7,252,470 Receivable for investment securities sold 74,507,301 ---------- Total assets 1,053,140,172 ------------- Liabilities Disbursements in excess of cash on demand deposit 8,527 Payable for investment securities purchased 61,498,339 Payable upon return of securities loaned (Note 4) 24,565,000 Accrued investment management services fee 52,004 Other accrued expenses 82,191 Forward sale commitments, at value (proceeds receivable $52,097,594) (Note 1) 52,299,205 ---------- Total liabilities 138,505,266 ----------- Net assets $ 914,634,906 ============== * Including securities on loan, at value (Note 4) $ 24,139,420 --------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 18 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations Quality Income Portfolio Year ended May 31, 2005 Investment income Income: Interest $42,248,895 Fee income from securities lending (Note 4) 160,492 ------- Total income 42,409,387 ---------- Expenses (Note 2): Investment management services fee 4,922,235 Compensation of board members 11,748 Custodian fees 114,200 Audit fees 33,000 Other 45,780 ------ Total expenses 5,126,963 Earnings credits on cash balances (Note 2) (2,043) ------ Total net expenses 5,124,920 --------- Investment income (loss) -- net 37,284,467 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions (Note 3) 3,371,857 Foreign currency transactions (15,574) Futures contracts (2,636,370) ---------- Net realized gain (loss) on investments 719,913 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,053,971 ---------- Net gain (loss) on investments and foreign currencies 21,773,884 ---------- Net increase (decrease) in net assets resulting from operations $59,058,351 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 19 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets Quality Income Portfolio Year ended May 31, 2005 2004 Operations Investment income (loss) -- net $ 37,284,467 $ 43,667,562 Net realized gain (loss) on investments 719,913 10,488,305 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,053,971 (66,112,279) ---------- ----------- Net increase (decrease) in net assets resulting from operations 59,058,351 (11,956,412) ---------- ----------- Proceeds from contributions 50,501,206 8,835,237 Fair value of withdrawals (184,551,000) (465,582,594) ------------ ------------ Net contributions (withdrawals) from partners (134,049,794) (456,747,357) ------------ ------------ Total increase (decrease) in net assets (74,991,443) (468,703,769) Net assets at beginning of year 989,626,349 1,458,330,118 ----------- ------------- Net assets at end of year $ 914,634,906 $ 989,626,349 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 20 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to Financial Statements Quality Income Portfolio 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Income Portfolio (the Portfolio) is a series of Income Trust (the Trust) and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. The Portfolio invests primarily in investment-grade bonds. The Declaration of Trust permits the Trustees to issue non-transferable interests in the Portfolio. The Portfolio's significant accounting policies are summarized below: Use of estimates Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Valuation of securities All securities are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Securities purchased on a forward-commitment basis Delivery and payment for securities that have been purchased by the Portfolio on a forward-commitment basis, including when issued securities and other forward-commitments, can take place one month or more after the transaction date. During this period, such securities are subject to market fluctuations, and they may affect the Portfolio's net assets the same as owned securities. The Portfolio designates cash or liquid securities at least equal to the amount of its forward-commitments. At May 31, 2005, the Portfolio has entered into outstanding when-issued securities of $23,873,387 and other forward-commitments of $4,733,448. The Portfolio also enters into transactions to sell purchase commitments to third parties at current market values and concurrently acquires other purchase commitments for similar securities at later dates. As an inducement for the Portfolio to "roll over" its purchase commitments, the Portfolio receives negotiated amounts in the form of reductions of the purchase price of the commitment. - -------------------------------------------------------------------------------- 21 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Option transactions To produce incremental earnings, protect gains and facilitate buying and selling of securities for investments, the Portfolio may buy and write options traded on any U.S. or foreign exchange or in the over-the-counter market where completing the obligation depends upon the credit standing of the other party. The Portfolio also may buy and sell put and call options and write covered call options on portfolio securities as well as write cash-secured put options. The risk in writing a call option is that the Portfolio gives up the opportunity for profit if the market price of the security increases. The risk in writing a put option is that the Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that the Portfolio pays a premium whether or not the option is exercised. The Portfolio also has the additional risk of being unable to enter into a closing transaction if a liquid secondary market does not exist. Option contracts are valued daily at the closing prices on their primary exchanges and unrealized appreciation or depreciation is recorded. The Portfolio will realize a gain or loss when the option transaction expires or closes. When options on debt securities or futures are exercised, the Portfolio will realize a gain or loss. When other options are exercised, the proceeds on sales for a written call option, the purchase cost for a written put option or the cost of a security for a purchased put or call option is adjusted by the amount of premium received or paid. Futures transactions To gain exposure to or protect itself from market changes, the Portfolio may buy and sell financial futures contracts traded on any U.S. or foreign exchange. The Portfolio also may buy and write put and call options on these futures contracts. Risks of entering into futures contracts and related options include the possibility of an illiquid market and that a change in the value of the contract or option may not correlate with changes in the value of the underlying securities. Upon entering into a futures contract, the Portfolio is required to deposit either cash or securities in an amount (initial margin) equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by the Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. The Portfolio recognizes a realized gain or loss when the contract is closed or expires. Foreign currency translations and foreign currency contracts Securities and other assets and liabilities denominated in foreign currencies are translated daily into U.S. dollars. Foreign currency amounts related to the purchase or sale of securities and income and expenses are translated at the exchange rate on the transaction date. The effect of changes in foreign exchange rates on realized and unrealized security gains or losses is reflected as a component of such gains or losses. In the statement of operations, net realized gains or losses from foreign currency transactions, if any, may arise from sales of foreign currency, closed forward contracts, exchange gains or losses realized between the trade date and settlement date on securities transactions, and other translation gains or losses on dividends, interest income and foreign withholding taxes. - -------------------------------------------------------------------------------- 22 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Portfolio may enter into forward foreign currency exchange contracts for operational purposes and to protect against adverse exchange rate fluctuation. The net U.S. dollar value of foreign currency underlying all contractual commitments held by the Portfolio and the resulting unrealized appreciation or depreciation are determined using foreign currency exchange rates from an independent pricing service. The Portfolio is subject to the credit risk that the other party will not complete its contract obligations. Forward sale commitments The Portfolio may enter into forward sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of forward sale commitments are not received until the contractual settlement date. During the time a forward sale commitment is outstanding, equivalent deliverable securities, or an offsetting forward purchase commitment deliverable on or before the sale commitment date, are used to satisfy the commitment. Unsettled forward sale commitments are valued at the current market value of the underlying securities, generally according to the procedures described under "Valuation of securities" above. The forward sale commitment is "marked-to-market" daily and the change in market value is recorded by the Portfolio as an unrealized gain or loss. If the forward sale commitment is closed through the acquisition of an offsetting purchase commitment, the Portfolio realizes a gain or loss. If the Portfolio delivers securities under the commitment, the Portfolio realizes a gain or a loss from the sale of the securities based upon the market price established at the date the commitment was entered into. Forward sale commitments outstanding at period end are listed in the "Notes to investments in securities." Guarantees and indemnifications Under the Portfolio's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Portfolio. In addition, certain of the Portfolio's contracts with its service providers contain general indemnification clauses. The Portfolio's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Portfolio cannot be determined and the Portfolio has no historical basis for predicting the likelihood of any such claims. Federal taxes For federal income tax purposes the Portfolio qualifies as a partnership and each investor in the Portfolio is treated as the owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Portfolio. As a "pass-through" entity, the Portfolio therefore does not pay any income dividends or capital gain distributions. Other Security transactions are accounted for on the date securities are purchased or sold. Dividend income is recognized on the ex-dividend date or upon receipt of ex-dividend notification in the case of certain foreign securities. Interest income, including amortization of premium, market discount and original issue discount using the effective interest method, is accrued daily. - -------------------------------------------------------------------------------- 23 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 2. FEES AND EXPENSES The Trust, on behalf of the Portfolio, has an Investment Management Services Agreement with American Express Financial Corporation (AEFC) to manage its portfolio. Under this agreement, AEFC determines which securities will be purchased, held or sold. The management fee is a percentage of the Portfolio's average daily net assets that declines from 0.52% to 0.395% annually as the Portfolio's assets increase. Under the agreement, the Trust also pays taxes, brokerage commissions and nonadvisory expenses, which include custodian fees, audit and certain legal fees, fidelity bond premiums, registration fees for units, office expenses, consultants' fees, compensation of trustees, corporate filing fees, expenses incurred in connection with lending securities of the Portfolio and any other expenses properly payable by the Trust or Portfolio and approved by the board. Under a Deferred Compensation Plan (the Plan), non-interested trustees may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the underlying Fund or other American Express mutual funds. The Portfolio's liability for these amounts is adjusted for market value changes and remains in the Portfolio until distributed in accordance with the Plan. During the year ended May 31, 2005, the Portfolio's custodian fees were reduced by $2,043 as a result of earnings credits from overnight cash balances. According to a Placement Agency Agreement, American Express Financial Advisors Inc. acts as placement agent of the Trust's units. 3. SECURITIES TRANSACTIONS Cost of purchases and proceeds from sales of securities (other than short-term obligations) aggregated $2,647,379,968 and $2,763,783,105, respectively, for the year ended May 31, 2005. Realized gains and losses are determined on an identified cost basis. 4. LENDING OF PORTFOLIO SECURITIES At May 31, 2005, securities valued at $24,139,420 were on loan to brokers. For collateral, the Portfolio received $24,565,000 in cash. Cash collateral received is invested in short-term securities, which are included in the short-term section of the "Investment in securities." Income from securities lending amounted to $160,492 for the year ended May 31, 2005. The risks to the Portfolio of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. 5. INTEREST RATE FUTURES CONTRACTS At May 31, 2005, investments in securities included securities valued at $296,543 that were pledged as collateral to cover initial margin deposits on 200 open purchase contracts and 706 open sale contracts. The notional market value of the open purchase contracts at May 31, 2005 was $21,753,126 with a net unrealized gain of $66,388. The notional market value of the open sale contracts at May 31, 2005 was $79,965,535 with a net unrealized loss of $258,843. See "Summary of significant accounting policies" and "Notes to investments in securities." - -------------------------------------------------------------------------------- 24 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The table below shows certain important financial information for evaluating the Portfolio's results.
Ratios/supplemental data Fiscal period ended May 31, 2005 2004 2003 2002 2001 Ratio of expenses to average daily net assets(a) .54% .54% .52% .53% .52% Ratio of net investment income (loss) to average daily net assets 3.93% 3.62% 4.33% 4.89% 6.44% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(b) 6.49% (.77%) 6.56% 5.34% 12.06%
(a) Expense ratio is based on total expenses of the Portfolio before reduction of earnings credits on cash balances. The ratio does not include feeder fund expenses. (b) Total return is based on a calculated Portfolio net asset value and does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 25 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD OF TRUSTEES AND UNITHOLDERS INCOME TRUST We have audited the accompanying statement of assets and liabilities, including the schedule of investments in securities, of Quality Income Portfolio (a series of Income Trust) as of May 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. These financial statements and the financial highlights are the responsibility of portfolio management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2005, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Quality Income Portfolio as of May 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 - -------------------------------------------------------------------------------- 26 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Financial Statements Statement of assets and liabilities AXP Selective Fund May 31, 2005 Assets Investment in Portfolio (Note 1) $914,505,520 Capital shares receivable 89,312 ------ Total assets 914,594,832 ----------- Liabilities Dividends payable to shareholders 397,638 Capital shares payable 213,724 Accrued distribution fee 30,297 Accrued service fee 552 Accrued transfer agency fee 11,045 Accrued administrative services fee 4,996 Other accrued expenses 74,007 ------ Total liabilities 732,259 ------- Net assets applicable to outstanding capital stock $913,862,573 ============ Represented by Capital stock -- $.01 par value (Note 1) $ 1,051,806 Additional paid-in capital 938,558,301 Excess of distributions over net investment income (271,668) Accumulated net realized gain (loss) (Note 5) (32,767,478) Unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 7,291,612 --------- Total -- representing net assets applicable to outstanding capital stock $913,862,573 ============ Net assets applicable to outstanding shares: Class A $591,107,900 Class B $124,736,789 Class C $ 4,242,590 Class I $143,290,359 Class Y $ 50,484,935 Net asset value per share of outstanding capital stock: Class A shares 68,029,020 $ 8.69 Class B shares 14,357,845 $ 8.69 Class C shares 488,313 $ 8.69 Class I shares 16,490,222 $ 8.69 Class Y shares 5,815,214 $ 8.68 --------- ------------
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 27 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statement of operations AXP Selective Fund Year ended May 31, 2005 Investment income Income: Interest $42,243,400 Fee income from securities lending 160,469 ------- Total income 42,403,869 ---------- Expenses (Note 2): Expenses allocated from Portfolio 5,124,235 Distribution fee Class A 1,638,968 Class B 1,516,008 Class C 49,992 Transfer agency fee 1,198,674 Incremental transfer agency fee Class A 82,348 Class B 39,027 Class C 1,551 Service fee -- Class Y 64,993 Administrative services fees and expenses 477,298 Compensation of board members 9,573 Printing and postage 175,100 Registration fees 49,840 Audit fees 11,000 Other 16,615 ------ Total expenses 10,455,222 Expenses waived/reimbursed by AEFC (Note 2) (665,654) -------- 9,789,568 Earnings credits on cash balances (Note 2) (29,958) ------- Total net expenses 9,759,610 --------- Investment income (loss) -- net 32,644,259 ---------- Realized and unrealized gain (loss) -- net Net realized gain (loss) on: Security transactions 3,371,309 Foreign currency transactions (15,572) Futures contracts (2,636,009) ---------- Net realized gain (loss) on investments 719,728 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,051,280 ---------- Net gain (loss) on investments and foreign currencies 21,771,008 ---------- Net increase (decrease) in net assets resulting from operations $54,415,267 ===========
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 28 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Statements of changes in net assets AXP Selective Fund Year ended May 31, 2005 2004 Operations and distributions Investment income (loss) -- net $ 32,644,259 $ 36,407,873 Net realized gain (loss) on investments 719,728 10,487,801 Net change in unrealized appreciation (depreciation) on investments and on translation of assets and liabilities in foreign currencies 21,051,280 (66,106,407) ---------- ----------- Net increase (decrease) in net assets resulting from operations 54,415,267 (19,210,733) ---------- ----------- Distributions to shareholders from: Net investment income Class A (23,912,310) (26,365,292) Class B (4,361,239) (5,744,369) Class C (144,617) (180,386) Class I (2,796,739) -- Class Y (2,459,415) (4,136,231) ---------- ---------- Total distributions (33,674,320) (36,426,278) ----------- ----------- Capital share transactions (Note 3) Proceeds from sales Class A shares (Note 2) 45,644,903 79,211,532 Class B shares 11,147,044 22,932,095 Class C shares 642,495 1,212,212 Class I shares 153,620,994 -- Class Y shares 12,950,585 34,353,219 Reinvestment of distributions at net asset value Class A shares 19,053,522 21,394,439 Class B shares 3,923,698 5,231,020 Class C shares 127,953 159,927 Class I shares 2,725,902 -- Class Y shares 2,448,606 4,205,827 Payments for redemptions Class A shares (195,290,057) (311,025,257) Class B shares (Note 2) (83,730,597) (142,694,010) Class C shares (Note 2) (2,216,368) (4,975,937) Class I shares (13,407,549) -- Class Y shares (53,143,328) (123,235,606) ----------- ------------ Increase (decrease) in net assets from capital share transactions (95,502,197) (413,230,539) ----------- ------------ Total increase (decrease) in net assets (74,761,250) (468,867,550) Net assets at beginning of year 988,623,823 1,457,491,373 ----------- ------------- Net assets at end of year $ 913,862,573 $ 988,623,823 ============= ==============
See accompanying notes to financial statements. - -------------------------------------------------------------------------------- 29 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Notes to Financial Statements AXP Selective Fund 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Fund is a series of AXP Income Series, Inc. and is registered under the Investment Company Act of 1940 (as amended) as a diversified, open-end management investment company. AXP Income Series, Inc. has 10 billion authorized shares of capital stock that can be allocated among the separate series as designated by the board. The Fund offers Class A, Class B, Class C and Class Y shares. o Class A shares are sold with a front-end sales charge. o Class B shares may be subject to a contingent deferred sales charge (CDSC) and automatically convert to Class A shares during the ninth year of ownership. o Class C shares may be subject to a CDSC. o Class Y shares have no sales charge and are offered only to qualifying institutional investors. Effective July 15, 2004, the Fund offers an additional class of shares, Class I, exclusively to certain institutional investors. Class I shares have no sales charge and are made available through a separate prospectus supplement provided to investors eligible to purchase the shares. At May 31, 2005, AEFC and the AXP Portfolio Builder Series funds owned 100% of Class I shares, which represents 15.68% of the Fund's net assets. All classes of shares have identical voting, dividend and liquidation rights. The distribution fee, transfer agency fees and service fee (class specific expenses) differ among classes. Income, expenses (other than class specific expenses) and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. Investment in Quality Income Portfolio The Fund invests all of its assets in Quality Income Portfolio (the Portfolio), a series of Income Trust (the Trust), an open-end investment company that has the same objectives as the Fund. The Portfolio invests primarily in investment-grade bonds. The Fund records daily its share of the Portfolio's income, expenses and realized and unrealized gains and losses. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The Fund records its investment in the Portfolio at the value that is equal to the Fund's proportionate ownership interest in the Portfolio's net assets. The percentage of the Portfolio owned by the Fund at May 31, 2005 was 99.99%. - -------------------------------------------------------------------------------- 30 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT All securities held by the Portfolio are valued at the close of each business day. Securities traded on national securities exchanges or included in national market systems are valued at the last quoted sales price. Debt securities are generally traded in the over-the-counter market and are valued at a price that reflects fair value as quoted by dealers in these securities or by an independent pricing service. Securities for which market quotations are not readily available are valued at fair value according to methods selected in good faith by the board. Short-term securities maturing in more than 60 days from the valuation date are valued at the market price or approximate market value based on current interest rates; those maturing in 60 days or less are valued at amortized cost. Use of estimates Preparing financial statements that conform to U.S. generally accepted accounting principles requires management to make estimates (e.g., on assets, liabilities and contingent assets and liabilities) that could differ from actual results. Guarantees and indemnifications Under the Fund's organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, certain of the Fund's contracts with its service providers contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown since the amount of any future claims that may be made against the Fund cannot be determined and the Fund has no historical basis for predicting the likelihood of any such claims. Federal taxes The Fund's policy is to comply with all sections of the Internal Revenue Code that apply to regulated investment companies and to distribute substantially all of its taxable income to the shareholders. No provision for income or excise taxes is thus required. Net investment income (loss) and net realized gains (losses) may differ for financial statement and tax purposes primarily because of deferred losses on certain futures contracts, the recognition of certain foreign currency gains (losses) as ordinary income (loss) for tax purposes, and losses deferred due to "wash sale" transactions. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for federal income tax purposes. Also, due to the timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the year that the income or realized gains (losses) were recorded by the Fund. On the statement of assets and liabilities, as a result of permanent book-to-tax differences, undistributed net investment income has been increased by $983,881 and accumulated net realized loss has been increased by $983,881. - -------------------------------------------------------------------------------- 31 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The tax character of distributions paid for the years indicated is as follows: Year ended May 31, 2005 2004 Class A Distributions paid from Ordinary income $23,912,310 $26,365,292 Long-term capital gain -- -- Class B Distributions paid from: Ordinary income 4,361,239 5,744,369 Long-term capital gain -- -- Class C Distributions paid from: Ordinary income 144,617 180,386 Long-term capital gain -- -- Class I* Distributions paid from: Ordinary income 2,796,739 N/A Long-term capital gain -- N/A Class Y Distributions paid from: Ordinary income 2,459,415 4,136,231 Long-term capital gain -- -- * Inception date was July 15, 2004 At May 31, 2005, the components of distributable earnings on a tax basis are as follows: Undistributed ordinary income $ 182,805 Accumulated long-term gain (loss) $(29,747,019) Unrealized appreciation (depreciation) $ 4,214,318 Dividends to shareholders Dividends from net investment income, declared daily and payable monthly, when available, are reinvested in additional shares of the Fund at net asset value or payable in cash. Capital gains, when available, are distributed along with the last income dividend of the calendar year. 2. EXPENSES AND SALES CHARGES In addition to the expenses allocated from the Portfolio, the Fund accrues its own expenses as follows: The Fund has an agreement with AEFC to provide administrative services. Under an Administrative Services Agreement, the Fund pays AEFC a fee for administration and accounting services at a percentage of the Fund's average daily net assets that declines from 0.05% to 0.025% annually as the Fund's assets increase. A minor portion of additional administrative service expenses paid by the Fund are consultants' fees and fund office expenses. Under this agreement, the Fund also pays taxes, audit and certain legal fees, registration fees for shares, compensation of board members, corporate filing fees and any other expenses properly payable by the Fund and approved by the board. - -------------------------------------------------------------------------------- 32 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Under a Deferred Compensation Plan (the Plan), non-interested board members may defer receipt of their compensation. Deferred amounts are treated as though equivalent dollar amounts had been invested in shares of the Fund or other American Express mutual funds. The Fund's liability for these amounts is adjusted for market value changes and remains in the Fund until distributed in accordance with the Plan. Under a separate Transfer Agency Agreement, American Express Client Service Corporation (AECSC) maintains shareholder accounts and records. The Fund pays AECSC an annual fee per shareholder account for this service as follows: o Class A $20.50 o Class B $21.50 o Class C $21.00 o Class Y $18.50 The incremental transfer agency fee is the amount charged to the specific classes for the additional expense above the fee for Class Y. Class I pays a transfer agency fee at an annual rate per shareholder account of $1. This amount is included in the transfer agency fee on the statement of operations. In addition, AECSC is entitled to charge an annual closed account fee of $5 per inactive account, charged on a pro rata basis from the date the account becomes inactive until the date the account is purged from the transfer agent system generally within one year. However, the closed account fee is currently not effective. The Fund has agreements with American Express Financial Advisors Inc. (the Distributor) for distribution and shareholder services. Under a Plan and Agreement of Distribution pursuant to Rule 12b-1, the Fund pays a fee at an annual rate up to 0.25% of the Fund's average daily net assets attributable to Class A shares and up to 1.00% for Class B and Class C shares. Under a Shareholder Service Agreement, the Fund pays the Distributor a fee for service provided to shareholders by financial advisors and other servicing agents. The fee is calculated at a rate of 0.10% of the Fund's average daily net assets attributable to Class Y shares. Sales charges received by the Distributor for distributing Fund shares were $377,503 for Class A, $209,403 for Class B and $1,184 for Class C for the year ended May 31, 2005. For the year ended May 31, 2005, AEFC and its affiliates waived certain fees and expenses to 0.94% for Class A, 1.69% for Class B, 1.69% for Class C, 0.63% for Class I and 0.77% for Class Y. Of these waived fees and expenses, the transfer agency fees waived for Class A, Class B, Class C and Class Y were $481,790, $127,820, $4,547 and $51,497, respectively. Beginning June 1, 2005, AEFC and its affiliates have agreed to waive certain fees and expenses until May 31, 2006. Under this agreement, net expenses will not exceed 0.89% for Class A, 1.64% for Class B, 1.64% for Class C, 0.59% for Class I and 0.72% for Class Y of the Fund's average daily net assets. During the year ended May 31, 2005, the Fund's transfer agency fees were reduced by $29,958 as a result of earnings credits from overnight cash balances. - -------------------------------------------------------------------------------- 33 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 3. CAPITAL SHARE TRANSACTIONS Transactions in shares of capital stock for the years indicated are as follows:
Year ended May 31, 2005 Class A Class B Class C Class I* Class Y Sold 5,297,822 1,289,751 74,421 17,736,298 1,500,618 Issued for reinvested distributions 2,202,977 453,875 14,795 314,693 283,580 Redeemed (22,628,707) (9,719,218) (256,820) (1,560,769) (6,147,313) ----------- ---------- -------- ---------- ---------- Net increase (decrease) (15,127,908) (7,975,592) (167,604) 16,490,222 (4,363,115) ----------- ---------- -------- ---------- ---------- * Inception date was July 15, 2004. Year ended May 31, 2004 Class A Class B Class C Class I Class Y Sold 9,074,746 2,637,527 139,541 N/A 3,953,216 Issued for reinvested distributions 2,467,221 603,159 18,441 N/A 485,010 Redeemed (35,892,994) (16,404,096) (573,651) N/A (14,229,946) ----------- ----------- -------- ------ ----------- Net increase (decrease) (24,351,027) (13,163,410) (415,669) N/A (9,791,720) ----------- ----------- -------- ------ ----------
4. BANK BORROWINGS The Fund has a revolving credit agreement with a syndicate of banks headed by The Bank of New York, whereby the Fund may borrow for the temporary funding of shareholder redemptions or for other temporary or emergency purposes. The agreement went into effect Sept. 21, 2004. The Fund must maintain asset coverage for borrowings of at least 300%. The agreement, which enables the Fund to participate with other American Express mutual funds, permits borrowings up to $500 million, collectively. Interest is charged to each Fund based on its borrowings at a rate equal to either the higher of the Federal Funds Effective Rate plus 0.50% or the Prime Lending Rate. Borrowings are payable within 60 days after such loan is executed. The Fund also pays a commitment fee equal to its pro rata share of the amount of the credit facility at a rate of 0.09% per annum. Prior to this agreement, the Fund had a revolving credit agreement that permitted borrowings up to $500 million with Deutsche Bank. The Fund had no borrowings outstanding during the year ended May 31, 2005. 5. CAPITAL LOSS CARRY-OVER For federal income tax purposes, the Fund had a capital loss carry-over of $29,747,019 at May 31, 2005, that if not offset by capital gains will expire as follows: 2011 2013 2014 $24,224,582 $5,017,493 $504,944 It is unlikely the board will authorize a distribution of any net realized capital gains until the available capital loss carry-over has been offset or expires. - -------------------------------------------------------------------------------- 34 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT 6. FINANCIAL HIGHLIGHTS The tables below show certain important financial information for evaluating the Fund's results.
Class A Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .31 .28 .33 .40 .52 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .51 (.10) .51 .42 .94 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.32) (.28) (.33) (.40) (.52) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.32) (.28) (.37) (.42) (.52) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $591 $707 $955 $1,042 $1,004 Ratio of expenses to average daily net assets(b) .94%(c) 1.00% .98% .98% .97% Ratio of net investment income (loss) to average daily net assets 3.54% 3.17% 3.89% 4.45% 6.01% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 6.06% (1.17%) 6.05% 4.85% 11.52%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class A would have been 1.02% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 35 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class B Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .24 .21 .27 .33 .45 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .44 (.17) .45 .35 .87 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.25) (.21) (.27) (.33) (.45) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.25) (.21) (.31) (.35) (.45) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $125 $190 $315 $342 $264 Ratio of expenses to average daily net assets(b) 1.69%(c) 1.76% 1.74% 1.73% 1.73% Ratio of net investment income (loss) to average daily net assets 2.78% 2.40% 3.12% 3.67% 5.25% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 5.26% (1.92%) 5.25% 4.06% 10.69%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class B would have been 1.78% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 36 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class C Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001(b) Net asset value, beginning of period $8.50 $8.88 $8.74 $8.74 $8.40 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .24 .21 .27 .33 .42 Net gains (losses) (both realized and unrealized) .20 (.38) .18 .02 .34 ----- ----- ----- ----- ----- Total from investment operations .44 (.17) .45 .35 .76 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.25) (.21) (.27) (.33) (.42) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.25) (.21) (.31) (.35) (.42) ----- ----- ----- ----- ----- Net asset value, end of period $8.69 $8.50 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $4 $6 $10 $9 $4 Ratio of expenses to average daily net assets(c) 1.69%(d) 1.76% 1.75% 1.74% 1.73%(e) Ratio of net investment income (loss) to average daily net assets 2.79% 2.40% 3.07% 3.64% 5.16%(e) Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(f) 5.26% (1.92%) 5.24% 4.06% 9.27%(g)
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was June 26, 2000. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class C would have been 1.79% for the year ended May 31, 2005. (e) Adjusted to an annual basis. (f) Total return does not reflect payment of a sales charge. (g) Not annualized. - -------------------------------------------------------------------------------- 37 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class I Per share income and capital changes(a) Fiscal period ended May 31, 2005(b) Net asset value, beginning of period $8.55 ----- Income from investment operations: Net investment income (loss) .29 Net gains (losses) (both realized and unrealized) .15 ----- Total from investment operations .44 ----- Less distributions: Dividends from net investment income (.30) ----- Net asset value, end of period $8.69 ----- Ratios/supplemental data Net assets, end of period (in millions) $143 Ratio of expenses to average daily net assets(c) .63%(d) Ratio of net investment income (loss) to average daily net assets 3.92%(d) Portfolio turnover rate (excluding short-term securities) 297% Total return(e) 5.25%(f) (a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Inception date was July 15, 2004. (c) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (d) Adjusted to an annual basis. (e) Total return does not reflect payment of a sales charge. (f) Not annualized. - -------------------------------------------------------------------------------- 38 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Class Y Per share income and capital changes(a) Fiscal period ended May 31, 2005 2004 2003 2002 2001 Net asset value, beginning of period $8.49 $8.88 $8.74 $8.74 $8.32 ----- ----- ----- ----- ----- Income from investment operations: Net investment income (loss) .32 .29 .35 .42 .53 Net gains (losses) (both realized and unrealized) .20 (.39) .18 .02 .42 ----- ----- ----- ----- ----- Total from investment operations .52 (.10) .53 .44 .95 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (.33) (.29) (.35) (.42) (.53) Distributions from realized gains -- -- (.04) (.02) -- ----- ----- ----- ----- ----- Total distributions (.33) (.29) (.39) (.44) (.53) ----- ----- ----- ----- ----- Net asset value, end of period $8.68 $8.49 $8.88 $8.74 $8.74 ----- ----- ----- ----- ----- Ratios/supplemental data Net assets, end of period (in millions) $50 $86 $177 $188 $218 Ratio of expenses to average daily net assets(b) .77%(c) .84% .82% .81% .82% Ratio of net investment income (loss) to average daily net assets 3.70% 3.30% 4.04% 4.61% 6.16% Portfolio turnover rate (excluding short-term securities) 297% 292% 263% 389% 150% Total return(d) 6.24% (1.13%) 6.22% 5.02% 11.70%
(a) For a share outstanding throughout the period. Rounded to the nearest cent. (b) Expense ratio is based on total expenses of the Fund before reduction of earnings credits on cash balances. (c) AEFC waived/reimbursed the Fund for certain expenses. Had AEFC not done so, the annual ratio of expenses for Class Y would have been 0.86% for the year ended May 31, 2005. (d) Total return does not reflect payment of a sales charge. - -------------------------------------------------------------------------------- 39 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Report of Independent Registered Public Accounting Firm THE BOARD AND SHAREHOLDERS AXP INCOME SERIES, INC. We have audited the accompanying statement of assets and liabilities of AXP Selective Fund (a series of AXP Income Series, Inc.) as of May 31, 2005, the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period ended May 31, 2005, and the financial highlights for each of the years in the five-year period ended May 31, 2005. These financial statements and the financial highlights are the responsibility of fund management. Our responsibility is to express an opinion on these financial statements and the financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of AXP Selective Fund as of May 31, 2005, and the results of its operations, changes in its net assets and the financial highlights for each of the periods stated in the first paragraph above, in conformity with U.S. generally accepted accounting principles. KPMG LLP Minneapolis, Minnesota July 20, 2005 - -------------------------------------------------------------------------------- 40 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Federal Income Tax Information (UNAUDITED) The Fund is required by the Internal Revenue Code of 1986 to tell its shareholders about the tax treatment of the dividends it pays during its fiscal year. The dividends listed below are reported to you on Form 1099-DIV, Dividends and Distributions. Shareholders should consult a tax advisor on how to report distributions for state and local tax purposes. AXP Selective Fund Fiscal year ended May 31, 2005 Class A Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.02401 July 26, 2004 0.02400 Aug. 25, 2004 0.02494 Sept. 24, 2004 0.02500 Oct. 25, 2004 0.02587 Nov. 24, 2004 0.02641 Dec. 22, 2004 0.02736 Jan. 27, 2005 0.02650 Feb. 24, 2005 0.02800 March 30, 2005 0.02800 April 28, 2005 0.02800 May 26, 2005 0.02800 Total distributions $0.31609 Class B Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.01871 July 26, 2004 0.01849 Aug. 25, 2004 0.01960 Sept. 24, 2004 0.01966 Oct. 25, 2004 0.02034 Nov. 24, 2004 0.02106 Dec. 22, 2004 0.02235 Jan. 27, 2005 0.01993 Feb. 24, 2005 0.02297 March 30, 2005 0.02196 April 28, 2005 0.02286 May 26, 2005 0.02301 Total distributions $0.25094 - -------------------------------------------------------------------------------- 41 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class C Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.01867 July 26, 2004 0.01856 Aug. 25, 2004 0.01964 Sept. 24, 2004 0.01966 Oct. 25, 2004 0.02036 Nov. 24, 2004 0.02107 Dec. 22, 2004 0.02236 Jan. 27, 2005 0.01997 Feb. 24, 2005 0.02298 March 30, 2005 0.02199 April 28, 2005 0.02289 May 26, 2005 0.02300 Total distributions $0.25115 Class I Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share July 26, 2004 0.00854 Aug. 25, 2004 0.02657 Sept. 24, 2004 0.02739 Oct. 25, 2004 0.02828 Nov. 24, 2004 0.02859 Dec. 22, 2004 0.02896 Jan. 27, 2005 0.02933 Feb. 24, 2005 0.03017 March 30, 2005 0.03070 April 28, 2005 0.03043 May 26, 2005 0.03031 Total distributions $0.29927 - -------------------------------------------------------------------------------- 42 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Class Y Income distributions -- taxable as dividend income: Qualified Dividend Income for individuals 0.00% Dividends Received Deduction for corporations 0.00% Payable date Per share June 25, 2004 $0.02497 July 26, 2004 0.02523 Aug. 25, 2004 0.02621 Sept. 24, 2004 0.02618 Oct. 25, 2004 0.02707 Nov. 24, 2004 0.02761 Dec. 22, 2004 0.02847 Jan. 27, 2005 0.02787 Feb. 24, 2005 0.02912 March 30, 2005 0.02935 April 28, 2005 0.02914 May 26, 2005 0.02910 Total distributions $0.33032 - -------------------------------------------------------------------------------- 43 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Fund Expenses Example (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the six months ended May 31, 2005. Actual Expenses The first line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading titled "Expenses paid during the period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. - -------------------------------------------------------------------------------- 44 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Beginning Ending Expenses account value account value paid during Annualized Dec. 1, 2004 May 31, 2005 the period(a) expense ratio Class A Actual(b) $1,000 $1,023.80 $4.79(c) .95% Hypothetical (5% return before expenses) $1,000 $1,020.19 $4.78(c) .95% Class B Actual(b) $1,000 $1,020.00 $8.56(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70% Class C Actual(b) $1,000 $1,020.00 $8.56(c) 1.70% Hypothetical (5% return before expenses) $1,000 $1,016.45 $8.55(c) 1.70% Class I Actual(b) $1,000 $1,025.50 $3.13 .62% Hypothetical (5% return before expenses) $1,000 $1,021.84 $3.13 .62% Class Y Actual(b) $1,000 $1,024.70 $3.94(c) .78% Hypothetical (5% return before expenses) $1,000 $1,021.04 $3.93(c) .78%
(a) Expenses are equal to the Fund's annualized expense ratio as indicated above, multiplied by the average account value over the period, multiplied by 182/365 (to reflect the one-half year period). (b) Based on the actual return for the six months ended May 31, 2005: +2.38% for Class A, +2.00% for Class B, +2.00% for Class C, +2.55% for Class I and +2.47% for Class Y. (c) Beginning June 1, 2005, AEFC and its affiliates have contractually agreed to waive certain fees and to absorb certain expenses until May 31, 2006, unless sooner terminated at the discretion of the Fund's Board of Directors. Under this agreement, net expenses will not exceed 0.89% for Class A; 1.64% for Class B; 1.64% for Class C and 0.72% for Class Y. If this agreement had been in place for the entire six-month period ended May 31, 2005, the actual expenses paid would have been: $4.49 for Class A, $8.26 for Class B, $8.26 for Class C and $3.63 for Class Y; the hypothetical expenses paid would have been: $4.48 for Class A, $8.25 for Class B, $8.25 for Class C and $3.63 for Class Y. - -------------------------------------------------------------------------------- 45 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Board Members and Officers Shareholders elect a board that oversees the Fund's operations. The board appoints officers who are responsible for day-to-day business decisions based on policies set by the board. The following is a list of the Fund's board members. Each member oversees 14 Master Trust portfolios and 90 American Express mutual funds. Board members serve until the next regular shareholders' meeting or until he or she reaches the mandatory retirement age established by the board.
Independent Board Members Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------ ----------------------------- Arne H. Carlson Board member Chair, Board Services 901 S. Marquette Ave. since 1999 Corporation (provides Minneapolis, MN 55402 administrative services to Age 70 boards). Former Governor of Minnesota - -------------------------------------- --------------- ------------------------------ ----------------------------- Philip J. Carroll, Jr. Board member Retired Chairman and CEO, Scottish Power PLC, Vulcan 901 S. Marquette Ave. since 2002 Fluor Corporation Materials Company, Inc. Minneapolis, MN 55402 (engineering and (construction Age 67 construction) since 1998 materials/chemicals) - -------------------------------------- --------------- ------------------------------ ----------------------------- Livio D. DeSimone Board member Retired Chair of the Board Cargill, Incorporated 30 Seventh Street East since 2001 and Chief Executive Officer, (commodity merchants and Suite 3050 Minnesota Mining and processors), General Mills, St. Paul, MN 55101-4901 Manufacturing (3M) Inc. (consumer foods), Age 71 Vulcan Materials Company (construction materials/ chemicals), Milliken & Company (textiles and chemicals), and Nexia Biotechnologies, Inc. - -------------------------------------- --------------- ------------------------------ ----------------------------- Patricia M. Flynn Board member Trustee Professor of BostonFed Bancorp, Inc. 901 S. Marquette Ave. since 2004 Economics and Management, (holding company) and its Minneapolis, MN 55402 Bentley College since 2002; subsidiary Boston Federal Age 54 former Dean, McCallum Savings Bank Graduate School of Business, Bentley College from 1999 to 2002 - -------------------------------------- --------------- ------------------------------ ----------------------------- Anne P. Jones Board member Attorney and Consultant 901 S. Marquette Ave. since 1985 Minneapolis, MN 55402 Age 70 - -------------------------------------- --------------- ------------------------------ ----------------------------- Stephen R. Lewis, Jr. Board member Retired President and Valmont Industries, Inc. 901 S. Marquette Ave. since 2002 Professor of Economics, (manufactures irrigation Minneapolis, MN 55402 Carleton College systems) Age 66 - -------------------------------------- --------------- ------------------------------ -----------------------------
- -------------------------------------------------------------------------------- 46 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT
Independent Board Members (continued) Name, address, age Position Principal occupation during Other directorships held with past five years Fund and length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- Catherine James Paglia Board member Director, Enterprise Asset Strategic Distribution, 901 S. Marquette Ave. since 2004 Management, Inc. (private Inc. (transportation, Minneapolis, MN 55402 real estate and asset distribution and logistics Age 52 management company) since 1999 consultants) - -------------------------------------- --------------- ------------------------------- ---------------------------- Alan K. Simpson Board member Former three-term United 1201 Sunshine Ave. since 1997 States Senator for Wyoming Cody, WY 82414 Age 73 - -------------------------------------- --------------- ------------------------------- ---------------------------- Alison Taunton-Rigby Board member Founder and Chief Executive Hybridon, Inc. 901 S. Marquette Ave. since 2002 Officer, RiboNovix, Inc. (biotechnology) Minneapolis, MN 55402 since 2004; President, Age 61 Forester Biotech since 2000; prior to that, President and CEO, Aquila Biopharmaceuticals, Inc. - -------------------------------------- --------------- ------------------------------- ---------------------------- Board Member Affiliated with AEFC* Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- William F. Truscott Board member Senior Vice President - Chief 53600 AXP Financial Center since 2001, Investment Officer of AEFC Minneapolis, MN 55474 Vice President since 2001. Former Chief Age 44 since 2002 Investment Officer and Managing Director, Zurich Scudder Investments - -------------------------------------- --------------- ------------------------------- ----------------------------
* Interested person by reason of being an officer, director and/or employee of AEFC. - -------------------------------------------------------------------------------- 47 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The board has appointed officers who are responsible for day-to-day business decisions based on policies it has established. The officers serve at the pleasure of the board. In addition to Mr. Truscott, who is vice president, the Fund's other officers are:
Other Officers Name, address, age Position held Principal occupation during Other directorships with Fund and past five years length of service - -------------------------------------- --------------- ------------------------------- ---------------------------- Jeffrey P. Fox Treasurer Vice President - Investment 105 AXP Financial Center since 2002 Accounting, AEFC, since Minneapolis, MN 55474 2002; Vice President - Age 50 Finance, American Express Company, 2000-2002; Vice President - Corporate Controller, AEFC, 1996-2000 - -------------------------------------- --------------- ------------------------------- ---------------------------- Paula R. Meyer President Senior Vice President and 596 AXP Financial Center since 2002 General Manager - Mutual Minneapolis, MN 55474 Funds, AEFC, since 2002; Vice Age 51 President and Managing Director - American Express Funds, AEFC, 2000-2002; Vice President, AEFC, 1998-2000 - -------------------------------------- --------------- ------------------------------- ---------------------------- Leslie L. Ogg Vice President of Board Services 901 S. Marquette Ave. President, Corporation Minneapolis, MN 55402 Age 66 General Counsel, and Secretary since 1978 - -------------------------------------- --------------- ------------------------------- ---------------------------- Beth E. Weimer Chief Vice President and Chief 172 AXP Financial Center Compliance Compliance Officer, AEFC, Minneapolis, MN 55474 Officer since since 2001; Vice President Age 52 2004 and Chief Compliance Officer, AEFA, 2001-2005; Partner, Arthur Andersen Regulatory Risk Services, 1998-2001 - -------------------------------------- --------------- ------------------------------- ----------------------------
The SAI has additional information about the Fund's directors and is available, without charge, upon request by calling (800) 862-7919. - -------------------------------------------------------------------------------- 48 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT Approval of Investment Management Services Agreement American Express Financial Corporation (AEFC), a wholly-owned subsidiary of American Express Company, serves as the investment manager to the Fund. Under an Investment Management Services Agreement (the Agreement), AEFC provides investment advice and other services to the Fund. Throughout the year, the Funds' Board of Directors and the Board's Investment Review Committee monitor these services. Each year the Board determines whether to continue the Agreement by evaluating the quality and level of service received and the costs associated with those services. AEFC prepares detailed reports for the Board and its Contracts Committee in March and April and provides data prepared by independent organizations to assist the Board in making this determination. The Board gives considerable weight to the work, deliberations and conclusions of the Contracts and Investment Review Committees in determining whether to continue the Agreement. On February 1, 2005, American Express Company announced its intention to pursue a spin-off of AEFC by distributing shares of the common stock of AEFC to shareholders of American Express Company. At a meeting held in person on April 14, 2005, the Board, including a majority of the independent members, approved the continuation of the Agreement for an interim period, not to exceed one year, ending on the later of (i) the effective date of the spin-off or (ii) the approval by the Fund's shareholders of a new investment management services agreement with AEFC (the Interim Period). The spin-off will not result in an "assignment" of the Agreement under the Investment Company Act of 1940 and, therefore, will not cause the termination of the Agreement according to its terms. In connection with the spin-off AEFC has proposed that going forward, services under the Agreement be provided by an affiliate, RiverSource Investments, LLC (RiverSource). Independent counsel advised the Board that it would be prudent, in connection with the spin-off, to consider a new agreement with RiverSource and to seek shareholder approval of that agreement as soon as practical thereafter. Investment performance is a major factor in the evaluation process, and the Board reviewed the Fund's performance over a range of different periods by comparing its performance to relevant Lipper and broader market indices. The Board considered that over time the Fund's investment performance should be above the median for a peer group of funds with similar investment goals and noted that the Fund's investment performance in 2004 approximated the median. The Board noted that, in addition to portfolio management and investment research, AEFC provides portfolio trading, daily net asset value calculation, management of cash flow, product development, administration of its compliance and legal departments, access to distribution, accounting and recordkeeping, and reporting to the Board and shareholders. To evaluate these services, the Board referred to surveys and benchmarks established by commercial providers, trade associations and AEFC's internal processes. The Board concluded that the services provided were consistent with services provided by investment managers to comparable mutual funds. - -------------------------------------------------------------------------------- 49 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT The Board also evaluated the price paid for the services provided by AEFC, noting the existence of a pricing philosophy, established by the Board and AEFC, that seeks to maintain total Fund expenses within a range of the median expenses charged to comparable funds sold through financial advisors. The Board considered detailed information set forth in an annual report on fees and expenses, including, among other things, data showing a comparison of the Fund's expenses with median expenses paid by funds in its comparison group and data showing the Fund's contribution to AEFC's profitability. The Board determined that while the Fund's expenses are relatively high for its comparison group, the existing fee waiver has been increased to reduce further the expenses the Fund will pay. The Board considered the economies of scale that might be realized by AEFC as the Fund grew and took note of the extent to which Fund shareholders also might benefit from such growth. The Board considered that the Agreement provided for lower fees as assets increase at pre-established breakpoints and concluded that the Agreement satisfactorily provided for sharing these economies of scale. The Board took into account the Contracts Committee's discussion comparing the fees AEFC charges to the Fund with those it charges to institutional clients, noting that the relatively higher fees paid by the Fund were principally attributable to the additional services required to manage a regulated mutual fund, like the Fund, and the operation of a large mutual fund family. The Board also considered the profitability realized by AEFC and its affiliates from its relationship with the Fund. The Board took into account the services acquired by AEFC through the use of commission dollars paid by the Fund on portfolio transactions. The Board concluded that AEFC's overall costs and profitability were appropriate, although profitability may be too low on an ongoing basis. The Board noted that the fees paid by the Fund should permit AEFC to offer competitive compensation to its personnel, make necessary investments in its business and earn an appropriate profit. Based on the foregoing, the Board concluded that the fees paid to AEFC under the Agreement were fair and reasonable and determined to approve renewal of the Agreement for the Interim Period. Proxy Voting The policy of the Board is to vote all proxies of the companies in which the Fund holds investments. The procedures are stated in the Statement of Additional Information (SAI). You may obtain a copy of the SAI without charge by calling (800) 862-7919; by looking at the website americanexpress.com/funds; or by searching the website of the Securities and Exchange Commission http://www.sec.gov. You may view the Fund's voting record for all portfolio companies whose shareholders meetings were completed the previous quarter on americanexpress.com/funds or obtain a copy by calling the Fund's administrator, Board Services Corporation, collect at (612) 330-9283. In addition, information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at http://www.sec.gov. - -------------------------------------------------------------------------------- 50 -- AXP SELECTIVE FUND -- 2005 ANNUAL REPORT (logo) AMERICAN EXPRESS (R) American Express Funds 70100 AXP Financial Center Minneapolis, MN 55474 This report must be accompanied or preceded by the Fund's current prospectus. Distributed by American Express Financial Advisors Inc. Member NASD. American Express Company is separate from American Express Financial Advisors Inc. and is not a broker-dealer. Item 2. (a) The Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. A copy of the code of ethics is filed as an exhibit to this form N-CSR. (b) During the period covered by this report, there were not any amendments to the provisions of the code of ethics adopted in 2(a) above. (c) During the period covered by this report, there were not any implicit or explicit waivers to the provisions of the code of ethics adopted in 2(a). Item 3. The Registrant's board of directors has determined that independent directors Livio D. DeSimone and Anne P. Jones, each qualify as audit committee financial experts. Item 4. Principal Accountant Fees and Services Fund - Related Fees* (a) Audit Fees. The fees paid for the years ended May 31, to KPMG LLP for professional services rendered for the audits of the annual financial statements for AXP Income Series, Inc. were as follows: 2005 - $11,000; 2004 - $10,884 (b) Audit - Related Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered in connection with the registrant's security count pursuant to Rule 17f-2 for AXP Income Series, Inc. were as follows: 2005 - $211; 2004 - $224 (c) Tax Fees. The fees paid for the years ended May 31, to KPMG LLP for tax compliance related services for AXP Income Series, Inc. were as follows: 2005 - $2,550; 2004 - $2,275 (d) All Other Fees. The fees paid for the years ended May 31, to KPMG LLP for additional professional services rendered for AXP Income Series, Inc. were as follows: 2005 - $461; 2004 - None (e) (1) Audit Committee Pre-Approval Policy. Pursuant to Sarbanes-Oxley pre-approval requirements, all services to be performed by KPMG LLP for the registrant and to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant must be pre-approved by the audit committee. (e) (2) 100% of the services performed for items (b) through (d) above during 2005 and 2004 were pre-approved by the audit committee. (f) Not applicable. (g) Non-Audit Fees. The fees paid for the years ended May 31, by the registrant for non-audit services to KPMG LLP were as follows: 2005 - None; 2004 - None The fees paid for the years ended May 31, to KPMG LLP by the registrant's investment adviser, and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant were as follows: 2005 - $75,900; 2004 - $71,000 (h) 100% of the services performed for item (g) above during 2005 and 2004 were pre-approved by the audit committee. * 2004 represents bills paid 6/1/03 - 5/31/04 2005 represents bills paid 6/1/04 - 5/31/05 Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of matters to a vote of security holders. Not applicable. Item 11. Controls and Procedures. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's Principal Financial Officer and Principal Executive Officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) Code of ethics as applies to the Registrant's principal executive officer and principal financial officer, as required to be disclosed under Item 2 of Form N-CSR, is attached as Ex. 99.CODE ETH. (a)(2) Separate certification for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX.99.CERT. (a)(3) Not applicable. (b) A certification by the Registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as EX.99.906 CERT. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) AXP Income Series, Inc. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Principal Executive Officer Date August 3, 2005 By /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Principal Financial Officer Date August 3, 2005 EX-99.CODE ETH 2 code-ethics.txt CODE OF ETHICS AMERICAN EXPRESS FUNDS PREFERRED MASTER TRUST GROUP (THE AXP FUNDS) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. Purpose of the Code; Covered Officers This code of ethics ("Code") for the AXP Funds (collectively, "Funds," and each, "Fund") applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is identified in Exhibit A) for the purpose of promoting, in connection with his or her duties: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely, and understandable disclosure in reports and documents that a Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance with laws and governmental rules and regulations applicable to the conduct of the Funds' business and their financial reporting; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions, such as the purchase or sale of securities or other property, with the Funds because of their status as "affiliated persons" of the Funds. The compliance programs and -1- procedures of the Funds and of American Express Financial Corporation ("AEFC"), the investment adviser to the Funds, are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Funds and AEFC, of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties, whether formally for the Funds or for AEFC, or for both, be involved in establishing policies and implementing decisions that will have different effects on AEFC and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Funds and AEFC and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. Each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; o not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Funds; o not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; III. Disclosure and Compliance o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including to the Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds and AEFC with the goal of promoting full, fair, accurate, timely, and understandable disclosure in the reports -2- and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules, and regulations. IV. Reporting and Accountability Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he or she has received, read, and understands the Code; o annually thereafter affirm to the Board that he or she has complied with the requirements of the Code; o not retaliate against any other Covered Officer or any employee of AEFC or its affiliated persons for reports of potential violations that are made in good faith; and o notify the general counsel of the Funds ("Funds General Counsel") promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Funds General Counsel is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officers will be considered by the Board Effectiveness Committees (the "Committees"). The Funds will follow these procedures in investigating and enforcing this Code: o The Funds General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, the Funds General Counsel believes that no violation has occurred, he or she is not required to take any further action; o Any matter that the Funds General Counsel believes is a violation will be reported to the Committees; o If the Committees concur that a violation has occurred, they will inform the Board, and the Board will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Committees will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. Other Policies and Procedures This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, AEFC, or any -3- affiliate of AEFC govern or purport to govern the activities of the Covered Officers, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. AEFC's code of ethics under Rule 17j-1 under the Investment Company Act is a separate requirement applying to the Covered Officers and others, and is not part of this Code. VI. Amendments Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Fund's Board, including a majority of its independent directors. Date: July, 2003 -4- Exhibit A Persons Covered by this Code of Ethics Paula R. Meyer President Jeffrey P. Fox Treasurer -5- EX-99.CERT 3 ex99-cert.txt CERTIFICATION PURSUANT TO 270.30A-2 OF THE INVESTMENT COMPANY ACT OF 1940 Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Paula Meyer, certify that: 1. I have reviewed this report on Form N-CSR of AXP Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 25, 2005 /s/ Paula R. Meyer -------------------------------- Name: Paula R. Meyer Title: President and Chief Executive Officer Certification Pursuant to 270.30a-2 of the Investment Company Act of 1940 I, Jeffrey Fox, certify that: 1. I have reviewed this report on Form N-CSR of AXP Income Series, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 25, 2005 /s/ Jeffrey P. Fox -------------------------------- Name: Jeffrey P. Fox Title: Treasurer and Chief Financial Officer EX-99.906 CERT 4 ex99-906cert.txt CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION AXP Income Series, Inc. (the Registrant) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Each of the undersigned below certifies that 1. This report on Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: July 25, 2005 /s/ Paula R. Meyer ------------------ Paula R. Meyer President and Chief Executive Officer Date: July 25, 2005 /s/ Jeffrey P. Fox ------------------ Jeffrey P. Fox Treasurer and Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR filed with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----